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The OECD has warned central banks against cutting interest rates too fast, flagging the threat posed by “persistent” inflation in the price of services.
The Paris-based organisation said in its latest global outlook that the world economy was showing “remarkable resilience”, as it welcomed a continued retreat in overall price pressures following the severest bout of inflation for a generation.
Its growth forecast for the US, the world’s largest economy, was sharply upgraded to 2.4 per cent next year, compared with 1.6 per cent in its September outlook, driven by solid consumption and underpinned by “brisk” wage growth.
Central banks in most of the OECD economies have cut rates in response to the fall in price pressures, with headline inflation in October back at target levels in about two-thirds of advanced economies covered by the report.
But with services price inflation at a median of 4 per cent across the group of rich nations, central banks could not afford to loosen their grip too much, the report said.
“Failing to durably contain inflation would only increase the risks to growth and real incomes,” said Álvaro Pereira, the OECD’s chief economist. “Even though the global economy is expected to remain resilient, risks and uncertainties are high.”
The OECD added in its outlook: “Persistent services inflation may jeopardise the ability to meet inflation targets.”
Many countries still had rates of core inflation — a measure that excludes changes in the price of food and energy, and is seen as a better gauge of underlying price pressures — that were higher than desirable, the OECD warned.
The prices of half the items in the inflation baskets of the US and UK were still growing at an annual rate that exceeded 3 per cent in October, the OECD found.
While the organisation predicted global growth of 3.3 per cent in 2025 and 2026, up from 3.2 per cent this year, it warned that rising protectionism and geopolitical conflicts threatened to weigh on growth.
Growth in China was also upgraded to 4.7 per cent for next year, while India was poised for a stronger than expected expansion of nearly 7 per cent in 2025, the OECD said.
Central banks are expected to continue cutting rates into 2025 and, in some cases, 2026 in all the major advanced economies other than in Japan, where borrowing costs are heading higher.
The European Central Bank’s benchmark deposit rate, now 3.25 per cent, should bottom out at 2 per cent towards the end of 2025, said the OECD. The US Federal Reserve’s target range would be lowered from 4.5-4.75 per cent currently to between 3.25-3.5 per cent by the first quarter of 2026, it forecast.
The OECD also flagged a rise in housing costs in several member countries, led by the UK, Canada, Australia and Latvia. Labour shortages, meanwhile were particularly severe in healthcare and information technology, the organisation said.
Data visualisation by Clara Murray in London